Memo from Moscow

Steel News from Russia, Ukraine and other CIS States

Russian steel - coming out of the crisis, October 2009

Impact of credit crisis on Russian steelmaking production

According to Rosstat, total industrial production in Russia for January to August 2009 dropped by ~14% in comparison with the 2008 level. Production of machinery and equipment fell by ~33%, of transport units by ~41%, and of Russian-made passenger cars by ~63%. The drop in Russian crude steel production for the 9 months of 2009 at about 25% is however much less than that in the USA (about 50%) or the EU (about 35%).
However - it is much worse than in China and India, which showed growth of steel output across the period. The big Russian steel producers today predict full year 2009 production levels at about 80% of the 2008 level, only.

Debt impact

Due to the economic crisis, debts of the Russian metallurgical holdings have mushroomed. Rusal's debt currently stands at $16.8 bn; of this, some $7.4 bn is owed to foreign banks.
The partnership debt of EvrazGroup is around $8.5 bn, Severstal debt is around $4.9 bn, and that of Metalloinvest is about $5.9 bn. Currently, all the Holdings are trying to restructure these debts; both externally with Russian Government support, as well as internally through efficiencies and cost management.

Investment impact

Investment activity in the Russian steel sector has reduced considerably during the recent months. According to the Ministry of Industry and Trade, the total value of investment in the Russian steel sector in 2009 will reach about 100 bn Rubles (much less therefore than the planned 2009 value of 150 bn Rubles - as set out according to the Strategic Development Plan for the Russian steel industry).
The Ministry's forecast for 2010 investment is about 120 bn Rubles. But according to the Ministry, this latest forecast rcognises that not all large or strategic investment projects in steel will go ahead as originally planned. Nonetheless, looking forward constructively:

Magnitogorsk Iron and Steel Works (MMK) is putting the Heavy Plate Mill 5000 and a new coating line into operation around Q4 2009. The new No 5 shop with Plate Mill 5000 (rated capacity 1.5 mt/y) has an investment value of about $1 bn.
Mill 5000 will produce plates up to 4,850 mm width of strength X100 for gas and oil industry, for shipbuilding and for bridge building, although the main customers will be pipemakers

The Chelyabinsk Pipe Rolling Mill of the ChTPZ Group will continue building a new and modern shop for the production of single-weld large diameter pipe. MMK's heavy plate mill 5000 will eventually supply the plate.
The main supplier of the equipment for this investment is SMS Meer (Germany). Plant capacity will be 600,000 tonnes per year and the cost of the pipe mill is about Euro 500 mn. Russia's Gazprombank has provided a 10 bn Rubles loan for completion of this modernisation project, and all the new equipment had been delivered to Chelyabinsk by September 2009.
The shop is thus ready for installation - start up of LDP production (including 1420 mm diameter pipe) is planned in 2010.

The Mechel Group will continue - together with Russian Railways - to build a new rail rolling mill for production of 100 metre length rails on the Chelyabinsk site.
The Russian Government is supporting this and other investment projects by state guarantee and through VAT anulment (for example, for Heavy Plate Mill 5000 of MMK and in future in 2011 for OMK's Mill 5000 at Vyksa).

About ten investment projects for building the EAF long product mini-mills continue in the Saratov, Ivanovo, Kaluga, Pskov, Volgograd, Tula and Moscow regions.

The Russian steel industry has good potential for development of its steel industry and associated metals processing. Even now some world-known market players are gaining top positions in Russian industry: annual turnovers in the Russia market of such leading companies as Siemens VAI and SMS Siemag Group reportedly exceed $1 billion each.
Danieli and the Tenova Group are also very active indeed in Russian Metallurgy. The Russian National Institute for metallurgical equipment VNIIMETMASH and METALLURGMASH Holding are also very busy with project plans for development and further modernization of the Russian steel sector.

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